Panos Tsakloglou: Current pension system is exposed to demographic risk

The Athens Digest begins its interview series with Panos Tsakloglou, the Deputy Minister of Labour and Social Affairs.

The ‘don’t fix it, if it works’ approach doesn’t work anymore, he says. Speaking to John Papageorgiou, Tsakloglou stresses that the upcoming pension reform will provide a boost to employment, productivity, wages and growth. The former Greece representative at the EWG adds that the EU institutions are aware the government’s plan and an in-depth discussion with them will follow after the completion of three relevant ongoing studies.

 

A new pension reform, switching from the current supplementary system to a capitalized one is a priority for you. Why?

For four reasons.  First, the entire system of social insurance in Greece is distributive with no risk diversification.  Such systems function quite well when there are many workers and relatively few pensioners, but they become quite problematic in ageing societies.  Οther countries, when the ageing problem became apparent, promoted supplementary pensions through occupational funds operating on a funded basis.  In Greece we established auxiliary pensions operating on a pay-as-you-go (distributive) basis – astonishingly, with accrual rates even higher than those applied for the main pensions – thus increasing rather than decreasing the so called “demographic risk”.  Second, the current system of social insurance does not promote growth.  A substantial proportion of the funds collected through the insurance contributions of the new system will be invested in the Greek economy, thus contributing to higher employment, increased productivity and accelerated growth rates.  Third, the experience of several countries demonstrates that the long-run rates of return of funded systems are higher than those of unfunded systems, especially in ageing societies.  Therefore, we expect that the pensions of the new systems will be higher than those of the current one. Fourth, many young workers seem to be disillusioned with the current system and do not expect to receive a decent pension when they retire despite paying their social insurance contributions – thus, increasing their incentives to participate in the informal labour market.  The new system with individual accounts directly linked with their pensions provides strong incentives for participation in the formal labour market, thus diminishing an important distortion of the Greek economy.

 

Why has such a reform not progressed to date? Do you expect unions to react?

The problems of the Greek pension system – including its huge exposure to the very serious “demographic risk” – were known for a long time.  However, before the crisis there was a mentality of “do not fix it, if it works”.  During the last decade there were several pension reforms as well as pension cuts that restored the system’s long-run sustainability, but they left it fully exposed to the “demographic risk” while its contribution to economic growth is non-existent.  I suspect that such a reform was not undertaken, despite its desirability, primarily because in a transition from an unfunded to a funded system there is a generation of workers that has to pay twice.  For their own pensions through their contributions and for the pensions of the previous generation through their taxes.  In the past, trade unions opposed any kind of pension reform.  In recent years there are voices in favour of reform.  We plan to engage in an in-depth constructive dialogue with political parties, social partners as well as the society at large and we will try to explain in detail the benefits of the reform.

 

How does this reform affect the annual budget and the sustainability of the Greek debt?

Since there will be no cuts and the pensions of the current system will continue to be paid according to the existing rules, there will be a funding gap.  This gap is the “gross” cost of the introduction of the new system.  However, as I mentioned earlier, a considerable proportion of the contributions of the new system will be invested in the business sector of the Greek economy, providing a boost to employment, productivity, wages and growth.  They, in turn will be translated in higher levels of social insurance contributions as well as higher direct and indirect taxes, i.e. higher budget revenues.  Subtracting these additional fiscal revenues from the “gross” cost we get an estimate of the “net” cost of the reform, while at the same time we have a higher denominator in the debt/GDP ratio.  In order to have a better understanding of these forces, we commissioned three studies that are currently being carried out.  The first is an actuarial study that will provide estimates of the funding gap.  The second is a study analyzing the macroeconomic effects of the proposed reform, including additional fiscal revenues and revised (vis-à-vis the baseline – i.e. no reform) GDP levels.  The third is a debt sustainability analysis that will provide estimates of the debt/GDP ratio and will compare them with the baseline.  These studies will accompany the draft legislation when it will be submitted to Parliament.  Their estimates will provide answers to your questions.

Given that the Greek economy falls under the EU enhanced surveillance framework, a discussion with the institutions on the pension issue is required. Have you noted any progress on this one? When do you think the new bill will be submitted to Parliament?

The institutions are aware that we are planning this reform.  Naturally, once the draft legislation and the results of the above studies are ready, we will engage in in-depth discussion with them.  We hope to submit the new legislation to Parliament close to the end of the first quarter of the current year.

 

The recent cabinet reshuffle resulted in most of the key government ministers maintaining their posts, with the main exceptions of yours and that of the minister of the interior. How do you comment on that? Many believe that shortly after the pension reform, elections will follow…

As you know, in our country both a government reshuffle and the timing of the elections are privileges of the Prime Minister.  In an interview a couple of days ago PM Mitsotakis stated explicitly that there will be no changes in the government’s agenda while he ruled out elections this year.

 

The consequences of the pandemic on the global economy are severe. If we rely on the optimistic scenario for vaccination within 2021, how do you expect the next day will be shaped in terms of competitiveness and public debt among the EU Member States and beyond?

Usually, after exogenous crises, like the current one, economies recover relatively quickly, although this applies primarily when the crises are short.  Most international organizations anticipate that a robust recovery will start around the middle of this year and will get stronger in the next years.  This anticipation hinges on the assumptions of vaccine efficacy against all variants of covid-19 and widespread vaccination of the population.  I do hope that both the assumptions and the predictions will be correct. During the current crisis, all developed countries tried to protect their firms and provide support to the households that were adversely affected.  This was absolutely necessary but led to high budget deficits and debt levels.  Fortunately, with the intervention of the central banks, interest rates were kept low and public debts were easily refinanced.  Naturally, when growth resumes, public finances will be gradually restored.  However, I do hope that the support measures will not be withdrawn prematurely, leading to a new crisis.  On the negative side it should be noted that during the crisis, apart from public debt, private debt rose sharply too, leading to unprecedented levels of total debt, while evidence of past educational disruptions suggests that the long-term effects of the crisis on the quality of human capital is likely to be substantial with obvious implications for the potential long-run growth rates.